Dark Accounting Matter
Physicists calculate that approximately 85% of the matter in the universe is composed of “dark matter” that “does not absorb, reflect, or emit electromagnetic radiation and is therefore difficult to detect.” The S&P 500 currently trades at a price to book value of 4.2, suggesting that book value accounts for less than 20% of the […]
Colleen Honigsberg is Associate Dean of Curriculum and Professor of Law at Stanford Law School. This post is based on her recent paper.
Physicists calculate that approximately 85% of the matter in the universe is composed of “dark matter” that “does not absorb, reflect, or emit electromagnetic radiation and is therefore difficult to detect.” The S&P 500 currently trades at a price to book value of 4.2, suggesting that book value accounts for less than 20% of the S&P 500’s market value. The remaining 80%, appears nowhere in these firms’ balance sheets—it is invisible to contemporary accounting techniques and constitutes “dark accounting matter.”
In a recent article, I explain that dark accounting matter has become a significant limitation on the relevance of financials reported under Generally Accepted Accounting Principles (GAAP). Notably, as I explain, some “dark accounting matter” is composed of factors commonly described as components of “ESG.” Human capital, for example, is an intangible asset omitted from balance sheets, and is commonly categorized under the S in ESG. Therefore, rather than create separate disclosure regimes, I suggest a unified approach for disclosure of valuable intangible assets—regardless of whether those assets fall under “ESG” or reflect traditional intangible assets such as intellectual property. More precisely, I suggest that issuers be asked to describe and discuss factors that contribute to the difference between their market and book values, and to provide tailored disclosures that seek to shed light on that difference.
